a general obligation pledge of a private university.
Most private universities that sell debt issue unse-
cured general obligations, supported by a full faith
and credit pledge. Sometimes particular issuing
authorities (since most private universities who issue
tax-exempt debt must issue debt through a tax-
exempt conduit issuer) require a lien against certain
revenues of the institution and the maintenance of
legal covenants such as asset to liability ratios.
However, these legal requirements would not raise a
private college debt rating above its GO rating.
Public universities, in contrast, may issue a variety
of debt types and very few have the ability to issue
full faith and credit debt. However, a school’s flexi-
bility to raise tuition and fees charged against all stu-
dents, for example, allows Standard & Poor’s to rate
unlimited student fee or tuition fee pledges for public
colleges and universities on par with an institution’s
GO rating. This policy is important in analyzing
public institutions because many public schools are
restricted in their use of GO and state appropriation
pledges. Other types of security pledges may be
applied to a university’s bonded debt, such as pledges
of revenues from a specific enterprise, including dor-
mitories and parking systems, or a limited pledge of
tuition or student fees (see section on privatized dor-
mitories and enterprise financings for more informa-
tion on auxiliary revenue bonds).
Standard & Poor’s views debt secured by enter-
prise funds to be generally weaker than GO or
tuition pledges. For example, a dormitory bond’s
revenue source may be limited to room rentals,
while a GO or tuition pledge implies a much broad-
er revenue-raising capability. A bond secured by
tuition or a school’s GO pledge is likely to experi-
ence problems only if the entire school experiences
difficulty. An individual dormitory, on the other
hand, could close without necessarily affecting uni-
versity operations. However, if the revenues pledged
are from a large dormitory system, and most stu-
dents live on campus, dormitory revenues could per-
haps be as important to the college’s overall health
as tuition and student fees. The dormitory’s value to
the school largely determines the distance between
the dormitory rating and the school’s GO rating.
Covenants
Rate covenants and additional bonds tests also are
examined. However, with the exception of enter-
prise debt, these provisions generally carry less
weight in university analysis than in other types of
bond issues for other municipal enterprises. This
de-emphasis is because the payment of debt service
depends less on the maintenance of specific rates
and charges than on demand for the institution’s
services and its financial health. Additional bonds
tests for virtually all GO pledges do not enhance
bondholder protection because the requirements,
which are usually based on assets and liabilities,
impose no real constraint on the college. However,
enterprise operations must set rates to provide suffi-
cient coverage; therefore, for enterprise-backed
debt, Standard & Poor’s prefers rate covenants and
additional bonds tests with substance. Rate
covenants usually require institutions or their gov-
erning boards to set rates and charges which would
enable debt service coverage to meet greater than
sufficient coverage. Minimum rate covenants of
1.15x-1.2x are acceptable, if debt service coverage
is historically good and stable. The strongest addi-
tional bonds tests require historical revenues to be
at least 1.25x future maximum annual debt service,
including the proposed bonds. Many other addi-
tional bonds tests in this sector are proposed, rather
than historical, and allow certification of future
revenues by a business officer of the college.
Debt service reserve policies. Cash flow consider-
ations in colleges and universities usually are less of
a problem than in other municipal enterprises;
therefore, reserve funds are not always necessary.
While it is true that tuition revenue inflows are sea-
sonal, the presence of unrestricted resources and
endowment often compensates for the absence of a
reserve, or rainy day, fund. Nevertheless, bonds
secured strictly by enterprise revenues generally
require a fully funded debt service reserve fund,
even if the college has a large endowment.
Other liabilities and debt-like instruments
Standard & Poor’s also incorporates other liabilities
in its analysis of financial resources. These can
include short-term debt outstanding at year-end,
unfunded pension liabilities and postretirement bene-
fits, contingent liabilities, debt obligations of affili-
ates and wholly owned subsidiaries, and operating
leases. Because our analysis focuses on retained equi-
ty, versus strictly cash and investments, all liabilities
reduce the amount of equity. Therefore, all liabilities
are indirectly captured in Standard & Poor’s calcula-
tion of unrestricted and expendable resources. A
large unfunded liability relating to postretirement
benefits such as health care and pensions could be of
concern if management has no plan for how to fund
these liabilities or benefits over time. Many colleges
and universities are frequent users of commercial
paper and variable rate debt obligations. Often com-
mercial paper has been authorized, but not issued. If
a commercial paper program is dormant, or the insti-
tution has never issued up to the authorized amount
of the program, only the actual amount issued by the
college will be incorporated in the financial ratios
based on audited financial statements. However, our
rating takes into account the possibility that addi-
tional may be issued.Higher Educationhttp://www.standardandpoors.com 181